Hong Kong Companies Court clarifies the applicability of Re Guy Kwok Hung Lam to cases involving an arbitration clause

In Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443, the Hong Kong Companies Court (the "Court") made a winding up order against the Company on the basis that it failed to pay security in time. In considering the Company's opposition grounds, the Court commented that it retains discretion to wind up a company in cases involving an arbitration clause.

Herbert Smith Freehills' Jojo Fan, Trevor Ho and Jody Luk represented the successful Petitioner.

This is the first case considering the Court of Final Appeal's ("CFA") landmark decision in Re Guy Kwok Hung Lam [2023] HKCFA 9 ("Guy Lam"; which we blogged here), which was handed down recently in May 2023 and involved a winding up petition based on a debt subject to a foreign exclusive jurisdiction clause.

Factual background

By a corporate guarantee dated 27 November 2017, the Company guaranteed the repayment of a certain convertible bond instrument. The issuer failed to repay the redemption amount payable under the instrument on maturity. The Petitioner therefore sought to recover the sum by presenting a winding up petition against the Company on 6 December 2022 (the "Petition").

The Company failed to file evidence in opposition in time and sought leave to do so at the first hearing before the Court.  The Court granted such leave on the condition that the Company pay the full debt (US$30,942,398) into Court within 21 days (the "Condition").

The Company failed to comply with the Condition and sought an extension of time of three months to comply with it. In response, the Petitioner submitted that it was entitled to a winding up order in the absence of any evidence in opposition to the Petition.

The Court refused to grant the time extension on the basis that the Company had failed to demonstrate it would be able to raise sufficient funds to be able to comply with the Condition. As such, there was no evidence in opposition to the Petition, and the Court granted a winding up order.

The Company's grounds of opposition 

The Court went on to consider the Company's grounds of opposition for completeness, in particular, the Company’s argument that the underlying bond instrument and the guarantee both contained an arbitration clause, and hence the underlying dispute should be referred to arbitration (the "Arbitration Ground").

Relying on Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (which we blogged here), the Petitioner contended that the Court should not stay the winding up petition because the Company had not taken steps to commence arbitration. The CFA's decision in Guy Lam did not change the approach in Lasmos.

The Court agreed with the Petitioner's submissions and rejected the Arbitration Ground for the following reasons:

1. The approach in Guy Lam only applies to exclusive jurisdiction clauses, not arbitration clauses.
2. In cases involving an arbitration clause, the Court is guided by principles expounded in other relevant cases, including the approach in Lasmos.
3. The CFA's judgment in Guy Lam does not lay down any general rule that if the agreement which gave rise to the petitioning debt contains an arbitration clause and there are no supporting creditors to the petition, the Court must dismiss or stay the winding up petition without considering the merit of the defence raised by the company.
4. The Court should not adopt a mechanistic approach or fetter the exercise of its discretion in cases involving an arbitration clause. Where a company raises a substantive defence to the petitioning debt, the Court should consider whether the “defence” is one which can readily be shown to be wholly without merit. If the Court is able to come to that view without considering any detailed arguments or disputed evidence, it would have no difficulty in concluding that the “defence” is one which “borders on the frivolous or abuse of process” even if the approach in Guy Lam applies. There is no proper basis to require the parties to refer their "dispute" to arbitration in the absence of any genuine "dispute" in respect of the debt.

Comments and conclusion

The Court's comments indicate that, even in cases involving an arbitration clause, the Court retains discretion to wind up a company and will not mechanically refer all such cases to arbitration without considering the merit of any defence raised by the company.

Herbert Smith Freehills (Jojo Fan, Trevor Ho and Jody Luk) successfully acted for the Petitioner in the case.

For more information, please contact Gareth Thomas, Partner, Rachael Shek, Partner, Jojo Fan, Partner, Peter Ng, Senior Associate, Trevor Ho, Associate, or your usual Herbert Smith Freehills contact.